Heterogeneity in Conformism, Firm Selection, and Home Bias

Abstract

This paper discusses the impact of conformism on product quality, firm selection, and trade patterns. It shows that when consumers have a higher degree of conformism and/or their distribution of conformism becomes more concentrated, the equilibrium average demand falls while product quality rises in a closed economy. In an international trade context, this strengthens the home consumption bias when consumers conform to the behavior of local people. The home bias is mitigated under globalization where individuals tend to conform to people worldwide. The paper also discusses the conditions under which conformism and conspicuousness are reconciled.